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February 20, 2010
Advertising Recovery Accelerating at CBS
CBS reported solid results with EPS, revenue, and EBITDA closely matching street estimates. The report did not provide the big positive surprise seen by News Corporation, with which it has a lot of overlap. This fact, plus some variances to estimates at the segment level, left investors wanting more. There was also some concern that the company did not provide detailed full year financial guidance. The stock traded down sharply after hours and in Friday morning trading but had fully recovered to a moderate gain by Friday afternoon. I think the afternoon reaction is the correct one and that CBS shares remain a great play on an advertising recovery that appears to be picking up steam.
CBS reported that advertising trends accelerated in the fourth quarter at all of its business – network TV, TV and radio stations, and billboards. This was expected though the improvement ran a bit ahead of expectations. The big news, however, is that ad trends so far in 2010 are accelerating further and running ahead of analyst estimates across the board. While this could change if the economy stutters or stumbles, for now, it appears as though analyst estimates were too low. As it turns out, on Friday many analysts raised estimates. I thought this was what I was hearing on the conference call which is why I was surprised by the afterhours decline.
CBS also provided better than expected guidance for 2010 political revenues and for the ultimate run rate on retransmission revenues (fees paid to CBS by cable and satellite companies for the right to carry their programming).
The downside in the report was higher programming expenses at the entertainment businesses (CBS, Showtime, and the new attempt to produce movies). These expenses look set to stay higher in 2010 and beyond. Also posing a challenge in 2010 will be tough comparisons in TV syndication. CBS had a big year in 2009 selling its self produced TV shows into domestic and international syndication markets. The pipeline is not bare but 2010 will see less revenue.
One other aspect of the CBS story that continues to firm up is the balance sheet. The company ended the year with almost $800 million in cash, enough to easily pay off 2009 debt maturities. Free cash flow in 2010 should match or exceed 2009's level as the TV syndication and Super Bowl cash hits the books. I suspect that CBS will refinance some debt that comes due in 2011 and beyond and then turn to a dividend increase and share repurchases later this year. This should serve as a catalyst for the stock along with what I still see as upside to earnings estimates.
Disclosure: CBS is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. CBS is a long position in the Entermedia Funds. Steve Birenberg is co-owner of the Entermedia Funds management company and co-portfolio manager of the Funds.
Posted by Steve Birenberg at February 20, 2010 10:07 AM in CBS
1.WHAT DO YOU THINK OF DAVID SACH BECOMING CETV'S NEW CFO?
2 WHAT DO YOU EXPECT AT CETV'S REPORT TOMORROW?
I do not know David Sach. I hve some emails and calls out to check up on him. His prior employers suggest an expereienced individual with the right kind of emerging markets exposure. I know he worked at MICC but I do not remember him.
I expect CETV to report inline with its guidance from October. They will benefit from exchange rates and an improvement in the Czech Republic. Those things will mask ongoing weakness in most other markets. The company will suggest that 2010 should be an up year in local currency with expanding margins but that it will 2H before it is evident. Also, expect an extensive discussion of Bulgaria with lots of focus on how quickly synergies will hit and how quickly losses there will dissipate. I still think it is early to expect a big move up in the stock and look for it to remain in the $25-30 range barring either another full blown crisis or clear evidence that advertising growth is most of the company's markets is accelerating.
Posted by: Steve at February 23, 2010 07:58 AM